Opinion of the European Monetary Institute on a consultation from the Swedish Ministry of Finance under Article 109f (6) of the Treaty establishing the European Community (the “Treaty”) and Article 5.3 of the Statute of the EMI as elaborated in the Council Decision of 22nd November 1993 (93/717/EC) on a draft proposal for legislation (Law 1995/96:172) repealing the Law on State support for banks and other credit institutions (Law 1993:765) (CON/96/03)
Date: 1996-04-12
Institutions: European Monetary Institute
Subjects: Sweden, bank, credit institution, financial stability, monetary crisis, national law

OPINION OF THE EUROPEAN MONETARY INSTITUTE

on  a  consultation  from  the  Swedish  Ministry  of  Finance  under  Article  109f  (6)  of  the  Treaty

establishing  the  European  Community  (the  “Treaty”)  and  Article  5.3  of  the  Statute  of  the  EMI  as

elaborated  in  the  Council  Decision  of  22nd  November  1993  (93/717/EC)  on  a  draft  proposal  for

legislation  (Law  1995/96:172)  repealing  the  Law  on  State  support  for  banks  and  other  credit

institutions (Law 1993:765).

CON/96/03

1.

The above consultation was initiated on 14th March 1996 by the Swedish Ministry of Finance

which requested  an  opinion  by  mid  April  1996.  For  this  purpose,  it  submitted  the  text  of  the

above draft legislation together with an explanatory memorandum (DS 1995:67) to the EMI.

2.

The EMI’s competence to deliver an opinion is based on Article 1, section 1, fifth indent, of the

Council  Decision  of  22nd  November  1993  (93/717/EC),  as  the  draft  legislation  concerns  the

termination  of  State  support  facilities  for  the  Swedish  banking  industry  and  may,  thus,  affect

the stability of financial institutions and markets.

3.

In 1992 Sweden adopted emergency measures to, inter alia, ensure that banks and certain other

credit  institutions  could  meet  their  commitments  on  a  timely  basis.  This  was  introduced  as  a

result  of  a  banking  crisis  which  developed  after  a  downturn  in  the  real  estate  market,  the

consequences  of  which  became  so  grave  that  they  threatened  the  stability  of  the  financial

markets  as  a  whole.  These  measures,  laid  down  in  Riksdag  Decision  1993:765,  entailed  the

possibility of State guarantees, loans, capital contributions and other instruments to safeguard

the  interests  of  creditors  of  financial  institutions  as  well  as  to  protect  the  functioning  and

integrity of the financial markets. They were intended to be of a temporary nature and to last as

long  as  the  banking  crisis  would  warrant  their  continued  existence.  After  monitoring

developments  in  the  financial  markets  in  general  and  the  situation  with  regard  to  individual

institutions  in  particular,  Swedish  financial  authorities  have  come  to  the  conclusion  that  the

above  emergency  measures  have  fulfilled  their  function  and  may  now  be  terminated.  The

Swedish  financial  authorities  concluded  that  the  banking  system  has  undergone  a  radical

financial and economic rehabilitation over the past two to three years. In particular, bad loans

have diminished, the capital adequacy of financial institutions has strengthened and there is an

increased  potential  in  profit  growth  as  well  as  improved  financing  conditions.  In  addition  to

these  macro-economic  considerations  which  plead  for  an  abolition  of  the  above  emergency

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measures, review of the financial situation with regard to individual institutions also shows that

continued existence of the above emergency measures is not warranted. It is therefore proposed,

through  the  above  draft  legislation,  to  repeal  Riksdag  Decision  1993:765  containing  the

emergency measures, per 1st July 1996.

4.

The  EMI  is  not  in  a  position  to  assess  in  detail  whether  the  effects  of  the  banking  crisis  in

Sweden  at  the  beginning  of  this  decade  have  now  diminished  to  such  an  extent  that  the

measures established through Riksdag Decision 1993:765 are no longer justified. This applies a

fortiori to the financial soundness of individual credit institutions. The EMI does, at the same

time, not have any reason to question the considerations of Sweden’s financial authorities with

regard to the abolition of the emergency measures. In addition, an undue continuation of such

measures may give rise to competition distortions. Moral hazard problems may in this case also

arise as financial institutions whose positions are covered by State guarantees may be inclined

to  take  more  risks  than  those  whose  business  is  not.  Hence,  the  abolition  of  the  above

emergency measures marks the financial system’s return to the undistorted working of an open

market economy with free competition favouring an efficient allocation of resources. The EMI,

therefore,  welcomes  the  fact  that  the  Swedish  financial  authorities  have,  over  the  past  few

years,  closely  monitored  whether  developments  warranted  continued  existence  of  the

emergency measures and now, on the basis of their observations, proposed termination thereof.

Finally,  the  EMI  notes  with  interest  the  undertaking  by  Sweden’s  financial  authorities  to

continue work on reshaping the organisation and functioning of prudential supervision and, in

particular, to focus on internal risk management and control practices.

5.

The EMI agrees that this opinion may be made public by the competent Swedish authorities at

their discretion.

12th April 1996